Busy week this week. Now the FSA have only gone and published their latest Consultation Paper (CP) on the treatment of legacy assets as far as commission and adviser charging are concerned. The paper’s title is CP11/26 and it turns out to be rather important.

First off, if you’re looking for it you can find it here .

Broadly what the paper says is that any recommendation given by an adviser to a client to vary their existing retail financial product in pretty much any way may no longer trigger a commission payment but may instead only be paid for by fee or by adviser charging. There are a few exceptions; I’ll come to them in a moment.

Client wants to top up? Switch funds? Decrement? Restart contributions? Then it’s adviser charging or a fee. End of.

The only time where commish isn’t banned is where an adviser is acting on a mandate given pre-RDR or where the client executes their own wishes without getting advice first (and if they do that why is the IFA getting paid commission at all?). The former covers situations where the IFA has, say, discretionary permissions and is managing a portfolio actively on a basis agreed before the RDR. Ongoing fund-based renewal commission agreed before RDR can continue too.

Weirdly, re-registration from one platform to another isn’t covered. The idea is that the investment isn’t changing, just the admin behind it. I know platforms aren’t currently classed as products, but this does feel a bit iffy. I’d expect it to change in time.

In my view the impact of this is massive. It’s potentially more disruptive than the rest of the RDR put together. Let me explain.

Firstly, for advisers the small amounts of income generated on top-ups, contribution increases and so on has formed a de facto trail stream for years. Advisers offering ongoing management on this basis – and there are many – now have to go back to the start. There will be some product impacts as a result of this; I’ll come to those.

Secondly, it’s one thing to get a client to agree a new way of working for new investments or new products. But to destabilise existing products this way is a whole different ballgame. Will we see situations where a client won’t pay a fee, the provider can’t build adviser charging and the adviser has to resign? Undoubtedly. Will the client suffer? Undoubtedly.

And that point about providers is crucial. Every – every – existing packaged product class now needs to be re-engineered. That’s a job that will cost hundreds of millions across the industry. Most older contract engines won’t be able to do it. But the value locked in those contracts represents the better part of the market cap of most providers. If there is – and there will be – a massive shift out of those products and into newer structures such as platforms which can cope with adviser charging then the future for providers looks terrible.

Even if a provider has built a platform, its profit signature is usually 1/3 or less than legacy business. That’s a huge dent. Shareholders don’t understand this yet, but when they do they will be deeply worried, I think.

Persistency is the biggest issue most providers face. So we can expect to see a mad rush as they try to build adviser charging onto the old systems where they can. This will drain development capital and resource at an unprecedented rate. Some will say ‘meh’ and just try to go round the adviser, keeping the commission for themselves – some have already said they’ll do that. Those providers deserve to lose. It’s one thing to disintermediate, quite another to trouser an unexpected revenue stream. The FSA say that because cash rebates aren’t banned (yet), this commission could be paid out to customers. Most contracts don’t have that facility and I’d guess that building it is just as big a job as building adviser charging.

So there are a couple of outcomes here. Providers reading this – be realistic about the work this will take. Speak openly to advisers about the impact on your development agenda and discuss persistency with them constructively. Don’t overpromise. The next 13 months are more important to you than the last 13 years.

Advisers reading this – don’t expect anything much in the way of product development this year, unless your providers have no legacy book. Where development plans exist, expect them to be disrupted. Meet providers halfway – have the persistency conversation early. Accelerate your own proposition development to incorporate this likely outcome.

If as an adviser or provider you have no legacy commission issue – congrats, you’re a winner out of this. Try not to be smug. For everyone else – all leave is cancelled. Oh, and if you’re looking for a career change, may I recommend IT contracting on legacy lifeco systems? You may do rather well.

Health warning – this is still a consultation paper. Things may change. I wouldn’t bet on it though…